Question

Exercise 24-1 Payback period computation; uneven cash flows LO P1 Beyer Company is considering the purchase of an asset for $180,000. It is expected to produce the following net cash flows. The cash flows occur evenly within each year. Year 1 Year 2 Year 3 Year 4 Year 5 Total Net cash flows $ 60,000 $ 40,000 $ 70,000 $ 125,000 $ 35,000 $ 330,000 Compute the payback period for this investment. (Cumulative net cash outflows must be entered with a minus sign. Round your Payback Period answer to 2 decimal place.)

Answer 1

Answer:

3.08 years

Explanation:

The computation of payback period is shown below:-

Payback period = Year up to which cumulative cash flow are negative + (Cumulative cash flow in period in A  ÷ cash flow of immediately year succeeding the period in A )

Year    Cash flow      cumulative cash flow

0          ($180,000)        ($180,000)

1            $60,000          ($120,000)

                            ($180,000 - $60,000)

2           $40,000           ($80,000)

                           ($120,000 - $40,000)

3           $70,000           ($10,000)

                           ($80,000 - $70,000)

4          $125,000           $115,000

(it will be end here because it excess from here)

Now we will put it into formula

Pay back period = 3 + (10,000 ÷ 125,000)

= 3 + 0.08

= 3.08 years